Warren Buffett Should Take Ownership of The “Banana” Republic

In a NY Times Op Ed this week, the financial guru of gurus, Warren Buffett warned of the dangers of the Federal Deficit:

The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.

…Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.

…I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt. The United States remains by far the most prosperous country on earth, and its debt-carrying capacity will grow in the future just as it has in the past. But it was a wise man who said, “All I want to know is where I’m going to die so I’ll never go there.” We don’t want our country to evolve into the banana-republic economy described by Keynes.

Well that makes sense, many of us have been warning about the size of the deficit for months. Of course it is a bit disingenuous since it was Barack Obama who put us into this deficit situation, and he is trying to increase the deficit even further. One of the key endorsements that Obama received early in his candidacy was from Warren Buffett. It was Buffett that gave Obama his economics “street cred.” In other words if we do turn into a “Banana Republic,” it is Buffett that grew the banana tree:

In Wednesday’s New York Times, billionaire investor Warren Buffet warned against the dangers of the U. S. government taking on too much debt. Doing so, he explained, could lead to hyperinflation and a devaluation of the American dollar that could transform the United States into a “banana republic economy.”

Printing money to cover government spending pushes down the worth of a currency. When a government makes more money, it increases the supply without adding any underpinned worth to the currency; no new goods of value are created, no new profits or income, just more money. Increasing the money supply reduces demand and drives the price down.

Mr. Buffet said there were other choices for covering U. S. federal debt — each perhaps better than what he referred to as the “greenback effect.”

Instead of running the printing presses 24/7, the U. S. could encourage other countries, notably China, to buy up its debt. But this raises issues of sovereignty.

Then there is the possibility of raising taxes or cutting expenditures, Mr. Buffett added. Yet, “legislators will correctly perceive” that doing either “will threaten their re-election.” So neither is likely to happen.

Unmentioned by Mr. Buffett as a downside to raising taxes is the likelihood that increasing taxes in the middle of a recession would hurt job creation and business expansion at precisely the wrong moment.

Finally, he wrote, Americans could lower the national debt by saving more and using those savings to buy such debt instruments as government bonds, a wise alternative that Mr. Buffett nonetheless believes is unlikely.

For 25 years now, central banks in industrialized countries have worked to give fiat money something approaching real worth by keeping inflation down and refusing to flood the markets with new paper. Since currencies are no longer backed by tangibles such as gold, controlling the money supply and inflation simultaneously is about the only way to keep governments from confiscating personal wealth by devaluing the value of the money people have in their pockets and in their assets such as homes and retirement accounts.

While Mr. Buffett does not hold out much hope that inflation and devaluation can be avoided– since they would seem to be the most politically palatable options — he is keeping his fingers crossed that other solutions could be found.

The irony of all of this is that Mr. Buffett himself is as responsible as any other private citizen in the U. S. for Washington’s out-of-control spending, big deficits and inflationary ways.

In his piece in the Times, Mr. Buffett goes out of his way to blame current federal overspending on efforts made “last fall” to avoid a Depressionlike run on banks and other financial institutions.

Why “last fall”? Because back then, George Bush was still president.

And why stick president Bush with blame for the ballooning U. S. debt? Because Mr. Buffett is a key economic advisor to current President Barrack Obama. Indeed, he is so close to Obama that some within the Obama camp have credited Mr. Buffett’s endorsement of candidate Obama last summer with giving the former Illinois senator the credibility he lacked on economic issues.

When Warren Buffett threw his reputationas the shrewdest of the shrewd investors behind a first-term senator with a funny name, many voters and political operatives who had never given Mr. Obama a sniff began taking notice. After all if Mr. Buffett said that “you couldn’t have anybody better in charge” of the economy, that was good enough for most people.

Mr. Buffett is no longer merely a wise investor, he is now also one of Mr. Obama’s closest economic advisors,. He is not just a detached presidential analyst, but a political player with a reputation on the line.

He enthusiastically endorsed Mr. Obama’s stimulus package in February and as recently as last month was calling for a second round of pump-priming.

He is directly associated with a president whose bailouts of car makers, subsidies to state and local governments, spending on union-built infrastructure projects and attempts to socialize health care have pushed or will push up U. S. debt by trillions, several times more than Mr. Bush’s bank and insurance bailouts. Mr. Buffett is no doubt correct about the perils of too much debt, but if he wants to see someone responsible for the U. S. mess, he need only look in the mirror.

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